<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-12638
------------------------------
F&M BANCORP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 52-1316473
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
110 THOMAS JOHNSON DRIVE
FREDERICK, MARYLAND 21702
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(301) 694-4000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK ($5 PAR VALUE)
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Common Stock of 9,360,885 shares outstanding as of October 31, 1999.
Exhibit index on page 32.
- --------------------------------------------------------------------------------
<PAGE>
F&M BANCORP
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
<S> <C>
Consolidated Balance Sheets,
September 30, 1999 and 1998 (Unaudited) and December 31, 1998.................................3
Consolidated Statements of Income and Comprehensive Income (Unaudited),
Three and Nine Months Ended September 30, 1999 and 1998.......................................5
Consolidated Statements of Changes in Shareholders' Equity (Unaudited),
Nine Months Ended September 30, 1999 and Twelve Months Ended December 31, 1998................7
Consolidated Statements of Cash Flows (Unaudited),
Nine Months Ended September 30, 1999 and 1998.................................................8
Notes to Consolidated Financial Statements (Unaudited).......................................10
Management's Discussion and Analysis of Financial Condition and Results of Operations........18
Quantitative and Qualitative Disclosures About Market Risk...................................30
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................................32
Signatures...................................................................................35
</TABLE>
2
<PAGE>
CONSOLIDATED BALANCE SHEETS
F&M BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
September 30, September 30, December 31,
1999 1998 1998
(Dollars in thousands, except per share amounts) (Unaudited) (Unaudited)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 48,398 $ 43,909 $ 47,665
Federal funds sold 8,324 20,732 11,652
Interest-bearing deposits with banks 3,860 18,064 16,737
- -----------------------------------------------------------------------------------------------------
Total cash and cash equivalents 60,582 82,705 76,054
- -----------------------------------------------------------------------------------------------------
Loans held for sale 1,997 3,146 4,810
- -----------------------------------------------------------------------------------------------------
Investment securities:
Held-to-maturity, fair value $106,131,
$102,687 and $100,478, respectively 107,355 100,351 98,231
Available-for-sale, at fair value 310,350 285,024 322,651
- -----------------------------------------------------------------------------------------------------
Total investment securities 417,705 385,375 420,882
- -----------------------------------------------------------------------------------------------------
Loans, net of unearned income 934,431 883,780 891,741
Less: Allowance for credit losses (12,425) (12,480) (12,817)
- -----------------------------------------------------------------------------------------------------
Net loans 922,006 871,300 878,924
- -----------------------------------------------------------------------------------------------------
Bank premises and equipment, net 30,797 31,731 31,252
Other real estate owned 1,147 2,294 1,705
Interest receivable 10,331 8,831 9,478
Intangible assets 6,908 7,018 6,875
Other assets 24,282 20,601 20,667
- -----------------------------------------------------------------------------------------------------
Total assets $1,475,755 $1,413,001 $1,450,647
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
CONSOLIDATED BALANCE SHEETS
F&M BANCORP AND SUBSIDIARIES (CONT.)
<TABLE>
<CAPTION>
September 30, September 30, December 31,
1999 1998 1998
(Dollars in thousands, except per share amounts) (Unaudited) (Unaudited)
- -----------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C> <C>
LIABILITIES
Deposits:
Noninterest-bearing $ 133,963 $ 139,021 $ 152,076
Interest-bearing 1,001,481 949,840 986,118
- -----------------------------------------------------------------------------------------------------
Total deposits 1,135,444 1,088,861 1,138,194
Short-term borrowings:
Federal funds purchased and securities sold
under agreements to repurchase 90,256 56,820 57,626
Other short-term borrowings 1,746 1,866 14,776
Long-term borrowings 103,746 116,155 94,246
Accrued interest and other liabilities 14,275 16,604 14,440
- -----------------------------------------------------------------------------------------------------
Total liabilities 1,345,467 1,280,306 1,319,282
- -----------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock, par value $5 per share;
authorized 50,000,000 shares;
issued and outstanding 9,360,856
shares (1) , 8,819,621 shares, and
8,834,242 shares, respectively 46,804 44,098 44,172
Surplus 73,970 60,898 61,214
Retained earnings 16,468 26,984 25,760
Accumulated other comprehensive (loss) income (6,954) 715 219
- -----------------------------------------------------------------------------------------------------
Total shareholders' equity 130,288 132,695 131,365
- -----------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,475,755 $1,413,001 $1,450,647
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) Restated to reflect 5% stock dividend paid July 28, 1999.
4
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
F&M BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
(Dollars in thousands, except per share amounts) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $19,022 $19,324 $56,194 $58,041
Interest and dividends on investment securities:
Taxable 4,572 3,872 13,375 11,626
Tax-exempt 1,495 1,208 4,433 3,352
Interest on deposits with banks 248 405 829 865
Interest on federal funds sold 27 38 220 321
- -----------------------------------------------------------------------------------------------------
Total interest income 25,364 24,847 75,051 74,205
- -----------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 9,762 9,847 29,312 28,846
Interest on federal funds purchased and
securities sold under agreements to repurchase 772 641 1,893 1,750
Interest on Federal Home Loan Bank borrowings 1,339 1,267 4,032 4,001
Interest on other short-term borrowings 25 14 54 110
- -----------------------------------------------------------------------------------------------------
Total interest expense 11,898 11,769 35,291 34,707
- -----------------------------------------------------------------------------------------------------
Net interest income 13,466 13,078 39,760 39,498
Provision for credit losses 100 625 950 1,781
- -----------------------------------------------------------------------------------------------------
Net interest income after provision
for credit losses 13,366 12,453 38,810 37,717
- -----------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trust income 683 696 2,193 2,073
Service charges on deposit accounts 1,583 1,407 4,547 4,434
Insurance income 1,577 1,379 4,965 4,487
Gains on sales of loans 199 401 552 1,561
Gains on sales of securities 15 159 14 897
Other operating income 1,355 1,326 3,996 4,165
- -----------------------------------------------------------------------------------------------------
Total noninterest income 5,412 5,368 16,267 17,617
- -----------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
F&M BANCORP AND SUBSIDIARIES (CONT.)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
(Dollars in thousands, except per share amounts) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NONINTEREST EXPENSE
Salaries 6,346 5,762 17,393 17,568
Pension and other employee benefits 1,220 1,097 3,655 4,013
Occupancy and equipment expense 1,799 2,006 5,553 6,062
Other operating expense 3,769 3,217 11,510 10,519
- ---------------------------------------------------------------------------------------------------
Total noninterest expense 13,134 12,082 38,111 38,162
- ---------------------------------------------------------------------------------------------------
Income before provision for income taxes 5,644 5,739 16,966 17,172
Provision for income taxes 1,539 1,612 4,569 4,786
- ---------------------------------------------------------------------------------------------------
Net Income $ 4,105 $ 4,127 $ 12,397 $ 12,386
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX:
Unrealized (losses) gains on securities $ (2,028) $ 823 $ (7,182) $ (223)
Reclassification adjustment for gains and
(losses) included in net income 9 100 9 585
- ---------------------------------------------------------------------------------------------------
Other comprehensive (loss) income (2,019) 923 (7,173) 362
- ---------------------------------------------------------------------------------------------------
Comprehensive income $ 2,086 $ 5,050 $ 5,224 $ 12,748
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE-BASIC (1)
Based on weighted average shares outstanding
of 9,339,761 for 1999, 9,248,497 for 1998 $.44 $.45 $1.33 $1.34
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE-DILUTED (1)
Based on weighted average shares outstanding
of 9,394,604 for 1999, 9,362,091 for 1998 $.44 $.44 $1.32 $1.32
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
Dividends per Share (1) $.27 $.20 $.79 $.74
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
(1) Restated for 5% Stock Dividend paid July 28, 1999.
6
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
F&M BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
Accumulated
Other
Common Retained Comprehensive
(Dollars in thousands except per share amounts) Stock Surplus Earnings Income (Loss) Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997 $42,389 $48,874 $34,245 $353 $125,861
Net income -- -- 13,556 -- 13,556
Dividend reinvestment plan -- -- (120) -- (120)
Cash dividends paid ($1.01 per share) -- -- (9,340) -- (9,340)
Stock consideration for options exercised
(3,217 shares) (16) (19) (90) -- (125)
Stock options exercised 285 1,382 -- -- 1,667
Stock dividend (302,819 shares) 1,514 10,977 (12,491) -- --
Other comprehensive income -- -- -- (134) (134)
- ----------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 $44,172 $61,214 $25,760 $219 $131,365
Net income -- -- 12,397 -- 12,397
Dividend reinvestment plan -- -- (82) -- (82)
Cash dividends paid ($.79 per share) -- -- (7,585) -- (7,585)
Stock consideration for options exercised
(11,554 shares) (58) (50) (261) -- (369)
Stock options exercised (94,964 shares) 471 1,264 -- -- 1,735
Stock dividend (443,884 shares)(1) 2,219 11,542 (13,761) -- --
Other comprehensive income -- -- -- (7,173) (7,173)
- ----------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1999 $46,804 $73,970 $16,468 $(6,954) $130,288
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) 5% Stock Dividend paid July 28, 1999
7
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
F&M BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
(Dollars in thousands) 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 12,397 $ 12,386
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for credit losses 950 1,781
Depreciation and amortization 2,364 2,664
Amortization of intangibles 807 388
Net premium amortization on investment securities 613 (23)
(Increase) decrease in interest receivable (853) 715
Increase in interest payable 1,683 3
Deferred income tax benefit -- (230)
Amortization (Accretion) of net loan origination fees 39 (182)
Loss (Gain) on sales of property 12 (422)
(Gain) on sales/calls of securities (14) (897)
Decrease in loans held for sale 2,813 3,068
Increase in other assets (563) (920)
Decrease in other liabilities (1,848) (1,243)
Other -- (1,630)
- ------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 18,400 15,458
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities to be held-to-maturity (19,477) (18,613)
Purchases of investment securities available-for-sale (119,239) (309,882)
Proceeds from calls of securities held-to-maturity -- 10,541
Proceeds from sales/calls of securities available-for-sale 12,995 114,155
Proceeds from maturing securities available-for-sale 108,182 146,424
Proceeds from maturing securities held-to-maturity 9,881 2,459
Net (increase) decrease in loans (44,071) 2,130
Purchases of premises and equipment (1,910) (1,562)
Proceeds from sales of property 558 4,101
Other investing activities (840) (1,427)
- ------------------------------------------------------------------------------------------------------
Net cash used in investing activities (53,921) (51,674)
- ------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
F&M BANCORP AND SUBSIDIARIES (CONT.)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
(Dollars in thousands) 1999 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in noninterest-bearing deposits, interest-bearing
checking, savings and money market accounts 15,303 8,257
Net (decrease) increase in certificates of deposit (18,053) 27,228
Net increase in federal funds purchased and
securities sold under agreements to repurchase 32,630 11,768
Net increase in other short-term borrowings 9,500 54,735
Net decrease in long-term borrowings (13,030) (37,855)
Cash dividends paid (7,585) (6,997)
Dividend reinvestment plan (82) (96)
Proceeds from issuance of common stock 1,366 1,113
- -----------------------------------------------------------------------------------------------
Net cash provided by financing activities 20,049 58,153
- -----------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (15,472) 21,937
Cash and cash equivalents at beginning of period 76,054 60,768
- -----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $60,582 $82,705
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for interest $33,630 $31,071
Cash payments for income tax 4,002 4,359
NON-CASH INVESTING AND FINANCING ACTIVITIES
Fair value adjustment for securities available for sale,
net of income taxes (7,173) 230
</TABLE>
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The foregoing financial statements are unaudited; however, in the opinion of
management, all adjustments (comprising only normal recurring accruals)
necessary for a fair presentation of the financial statements have been
included. A summary of F&M Bancorp and subsidiaries' ("Bancorp's") significant
accounting policies is set forth in Note 1 to the consolidated financial
statements in its Annual Report on Form 10-K for the year ended December 31,
1998.
Certain reclassifications to prior year balances have been made in the
accompanying consolidated financial statements to make disclosures consistent
with those of the current year.
NOTE 2. PENDING ACQUISITION
On September 7, 1999, Bancorp announced it had reached a definitive agreement
to acquire all of the outstanding capital stock of Patapsco Valley
Bancshares, Inc., Ellicott City, Maryland, in a tax-free transaction. Under
the terms of the agreement, Patapsco will merge with and into Bancorp. On the
effective date of the merger, each share of Patapsco common stock will be
converted into 1.18 shares of Bancorp's common stock, subject to adjustment
in certain circumstances. The transaction is subject to the approval of
federal regulatory authorities and Patapsco shareholders and is expected to
be completed in late 1999 or early 2000.
NOTE 3. ACQUISITIONS
On July 15, 1999, Bancorp consummated a merger with Potomac Basin Group
Associates, Inc. (Potomac Basin), in a tax-free exchange of shares accounted for
as a pooling-of-interests. Potomac Basin is a Beltsville, MD-based, full-line
independent insurance agency specializing in corporate employee benefit plans.
On June 18, 1999, Bancorp, through its subsidiary, Farmers & Mechanics National
Bank (the "Bank"), purchased certain assets and liabilities associated with the
Fairfield, PA office of Farmers Bank, a First Maryland Bancorp bank. Under the
terms of the agreement, the Bank assumed responsibility for services related to
checking, savings and certificates of deposit products totaling $10.8 million
and purchased the branch office and real estate located at 20 East Main Street,
Fairfield, PA.
On May 31, 1998, Bancorp acquired Keller-Stonebraker Insurance, Inc. ("K-S"),
Hagerstown, MD, in a tax-free exchange of shares accounted for as a
pooling-of-interests. K-S operates as an independent, wholly owned subsidiary of
the Bank and provides a full line of consumer and commercial business insurance
products through offices in Hagerstown, Cumberland, MD and Keyser, WV. Consumer
insurance products include annuities, homeowners, automobile, life and personal
umbrellas. Commercial business products include property and casualty packages,
workers' compensation, bonds, professional liability, umbrella, and 401(k) and
other benefit plans.
10
<PAGE>
On November 30, 1998, Bancorp completed the acquisition of Monocacy Bancshares,
Inc. and its commercial banking subsidiary, Taneytown Bank & Trust Company,
Taneytown, MD, in a tax-free exchange of shares accounted for as a
pooling-of-interests. Under the terms of the merger agreement, Taneytown Bank
was merged with and into the Bank at closing, increasing the Bank's assets by
approximately $304 million, loans by approximately $167 million, and deposits by
approximately $244 million.
NOTE 4. INVESTMENT SECURITIES
<TABLE>
<CAPTION>
Investment securities are summarized as follows:
September 30, 1999
- ---------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 126,838 $ 59 $ 2,933 $ 123,964
Obligations of states and political subdivisions 38,234 412 1,732 36,914
Mortgage-backed securities 138,332 13 5,443 132,902
- ---------------------------------------------------------------------------------------------------------
Total debt securities 303,404 484 10,108 293,780
Equity securities 16,837 -- 267 16,570
- ---------------------------------------------------------------------------------------------------------
Total available-for-sale 320,241 484 10,375 310,350
- ---------------------------------------------------------------------------------------------------------
Held-to-maturity:
Obligations of states and political subdivisions 96,579 570 1,775 95,374
Mortgage-backed securities 10,776 37 56 10,757
- ---------------------------------------------------------------------------------------------------------
Total held-to-maturity 107,355 607 1,831 106,131
- ---------------------------------------------------------------------------------------------------------
Total investment securities $427,596 $1,091 $12,206 $416,481
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
September 30, 1998
- ---------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $134,976 $ 932 $ 36 $ 135,872
Obligations of states and political subdivisions 23,239 333 -- 23,572
Other debt securities 7,697 -- -- 7,697
Mortgage-backed securities 98,246 271 42 98,475
- ---------------------------------------------------------------------------------------------------------------
Total debt securities 264,158 1,536 78 265,616
Equity securities 19,681 -- 273 19,408
- ---------------------------------------------------------------------------------------------------------------
Total available-for-sale 283,839 1,536 351 285,024
- ---------------------------------------------------------------------------------------------------------------
Held-to-maturity:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies 991 9 -- 1,000
Obligations of states and political subdivisions 83,080 2,082 25 85,137
Mortgage-backed securities 16,280 270 -- 16,550
- ---------------------------------------------------------------------------------------------------------------
Total held-to-maturity 100,351 2,361 25 102,687
- ---------------------------------------------------------------------------------------------------------------
Total investment securities $384,190 $ 3,897 $376 $387,711
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998
- -------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 118,271 $ 618 $ 110 $ 118,779
Obligations of states and political subdivisions 41,590 554 233 41,911
Other debt securities 2,328 9 -- 2,337
Mortgage-backed securities 140,374 275 485 140,164
- -------------------------------------------------------------------------------------------------------------
Total-debt securities 302,563 1,456 828 303,191
Equity securities 19,727 -- 267 19,460
- -------------------------------------------------------------------------------------------------------------
Total available-for-sale 322,290 1,456 1,095 322,651
- -------------------------------------------------------------------------------------------------------------
Held-to-maturity:
Obligations of states and political subdivisions 83,757 2,166 140 85,783
Mortgage-backed securities 14,474 221 -- 14,695
- -------------------------------------------------------------------------------------------------------------
Total held-to-maturity 98,231 2,387 140 100,478
- -------------------------------------------------------------------------------------------------------------
Total investment securities $420,521 $3,843 $ 1,235 $423,129
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Bancorp classifies its investments in debt and equity securities in two
categories: held-to-maturity and available-for-sale. Securities classified as
held-to-maturity are those debt securities that Bancorp has both the positive
intent and ability to hold to maturity. These securities are carried at cost,
adjusted for amortization of premiums and accretion of discounts, which are
recognized as adjustments to interest income using the interest method.
Securities classified as available-for-sale are equity securities with readily
determinable fair values and those debt securities that Bancorp intends to hold
for an indefinite period of time, but not necessarily to maturity. These
securities may be sold as part of its asset/liability management strategy, or in
response to significant movements in interest rates, liquidity needs, regulatory
capital considerations, and other similar factors. These securities are carried
at fair value, with any unrealized gains and losses reported as a separate
component of shareholders' equity, net of the related deferred tax effect.
Regardless of the classification, dividend and interest income, including
amortization of premiums and accretion of discounts arising at acquisition, are
included in interest income in the consolidated statements of income and
comprehensive income. Realized gains and losses, if any, determined based on the
adjusted cost of the specific securities sold, are reported as a separate line
item in noninterest income in the consolidated statements of income and
comprehensive income.
13
<PAGE>
The amortized cost and estimated fair values of investments at September 30,
1999 by contractual maturity are shown below. Expected maturities may differ
from contractual maturities because borrowers have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
(in thousands) Cost Value
- -------------------------------------------------------------------------------
<S> <C> <C>
Available-for-sale:
Within 1 year $26,867 $26,832
After 1 but within 5 years 56,462 55,632
After 5 years but within 10 years 70,336 67,778
After 10 years 11,407 10,635
Mortgage-backed securities 138,332 132,903
Equity securities 16,837 16,570
- -------------------------------------------------------------------------------
Total available-for-sale 320,241 310,350
- -------------------------------------------------------------------------------
Held-to-maturity:
Within 1 year 7,512 7,567
After 1 but within 5 years 32,283 32,679
After 5 years but within 10 years 20,735 20,539
After 10 years 36,049 34,589
Mortgage-backed securities 10,776 10,757
- -------------------------------------------------------------------------------
Total held-to-maturity 107,355 106,131
- -------------------------------------------------------------------------------
Total investment securities $427,596 $416,481
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
The carrying value of investment securities pledged to secure public deposits,
securities sold under repurchase agreements, Federal Home Loan Bank advances,
and for other purposes as required and permitted by law, totaled $160.4 million
at September 30, 1999.
14
<PAGE>
NOTE 5. LOANS
Loans, net of unearned income, consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
- --------------------------------------------------------------------------------
(In thousands) 1999 1998 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Real Estate Loans
Construction and land development $56,457 $ 69,616 $ 61,328
Secured by farmland 8,114 8,588 8,452
Residential mortgage 274,543 258,813 265,394
Other mortgage 213,129 184,013 198,131
Agricultural 982 556 560
Commercial and industrial loans 109,267 93,367 92,091
Consumer 268,711 261,031 257,968
Other loans 3,228 7,796 7,817
- --------------------------------------------------------------------------------
Totals $934,431 $883,780 $891,741
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
Loans to states and political subdivisions and industrial revenue bonds are
included in all other loans in the schedule above and in total loans in the
balance sheet.
The allowance for credit losses is maintained at a level which, in management's
opinion, is considered adequate to provide for possible loan losses on loans
currently held in the loan portfolio.
NOTE 6. BANK PREMISES AND EQUIPMENT
Investments in bank premises and equipment are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
- -----------------------------------------------------------------------------
(In thousands) 1999 1998 1998
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Bank premises and land $29,526 $29,036 $28,978
Furniture and equipment 24,693 24,196 24,430
Leasehold improvements 3,014 2,930 2,908
- -----------------------------------------------------------------------------
57,233 56,162 56,316
Less accumulated depreciation (26,436) (24,431) (25,064)
- -----------------------------------------------------------------------------
Net premises and equipment $30,797 $31,731 $31,252
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
</TABLE>
15
<PAGE>
NOTE 7. COMPREHENSIVE INCOME
Bancorp adopted Financial Accounting Standards Board ("FASB") Statement No. 130,
"Reporting Comprehensive Income," effective January 1, 1998. Other comprehensive
income consists entirely of unrealized gains (losses) on available-for-sale
securities. Income taxes allocated to other comprehensive income amounted to a
benefit of $1.3 million and a provision of $581 thousand for the third quarter
of 1999 and 1998, respectively and a benefit of $4.5 million and a provision of
$228 thousand for the nine months ended September 30, 1999 and 1998,
respectively.
NOTE 8. EARNINGS PER SHARE
Earnings per share ("EPS") data is computed and presented in accordance with
FASB Statement No. 128, "Earnings Per Share." As prescribed by the Statement,
the presentation of primary EPS has been replaced with the dual presentation of
basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing
net income available to common shareholders ("numerator") by the
weighted-average number of common shares outstanding for the period after giving
retroactive effect to stock dividends and stock splits ("denominator"). Diluted
EPS reflects the potential dilution that could occur if outstanding stock
options or other contracts to issue common stock, if any, were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of Bancorp. Diluted EPS is equal to the numerator
divided by the denominator plus the dilutive effect of outstanding stock
options.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
(Dollars in thousands) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $4,105 $4,127 $12,397 $12,386
====== ====== ====== ======
Basic EPS
Shares 9,355,737 9,260,586 9,339,761 9,248,497
EPS $0.44 $0.45 $1.33 $1.34
Dilutive Shares
Stock options 46,861 114,771 54,843 113,594
EPS $0.00 $0.01 $0.01 $0.02
Diluted EPS
Shares including options 9,402,598 9,375,357 9,394,604 9,362,091
EPS $0.44 $0.44 $1.32 $1.32
- ---------------------------------------------------------------------------------------------------
</TABLE>
NOTE 9. FUTURE CHANGES IN ACCOUNTING PRINCIPLES
In June, 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and for Hedging Activities", which calls for derivatives to be recognized in the
consolidated balance sheet at fair value and for subsequent changes in fair
value to be recognized in the consolidated statement of income and comprehensive
income. However, because non-derivative and non-financial transactions are still
measured using a mix of historical and current prices, the Statement retains
special accounting for gains and losses when derivatives are used in qualifying
hedges of assets, liabilities, and future transactions. The Statement unifies
qualifying criteria for hedges involving all types of derivatives, requiring
that a company document, designate, and assess the effectiveness of its hedges.
For hedges that meet the Statement's criteria, the derivative's gains and losses
will be allowed to offset gains and losses on, or forecasted cash flows of, the
hedged item.
16
<PAGE>
Among a number of other provisions, the Statement will also allow entities to
reclassify available-for-sale and held-to-maturity securities without calling
into question management's intent for the remainder of its securities
portfolios.
For calendar-year companies such as Bancorp, the Statement will take effect
beginning January 1, 2001. Historically, Bancorp has not made use of hedges and
other financial derivatives and is unable to predict the impact, if any, that
the application of Statement No. 133 will have upon consolidated financial
statements issued after 2000.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
F&M Bancorp's net income, before special items, for the third quarter of 1999
was $4.209 million, or $0.45 diluted earnings per share, compared with
earnings before special items of $4.049 million, or $0.43 diluted earnings
per share, for the third quarter of 1998. Per share amounts reported
previously have been restated to give effect to a 5% stock dividend issued in
July 1999 and the acquisitions of Keller-Stonebraker Insurance, Inc.,
completed in May 1998, Monocacy Bancshares, Inc., completed in November 1998
and Potomac Basin Group Associates, Inc., completed in July 1999, all
accounted for as a pooling-of-interests. Including special items, net income
of $4.105 million, or $0.44 diluted earnings per share for the third quarter
of 1999 decreased slightly from $4.127 million, or $0.44 diluted earnings per
share for the third quarter of 1998. Third quarter 1999 earnings were
favorably impacted by a decrease in the provision for credit losses of $525
thousand, or 84%, as well as a decrease in occupancy and equipment expense of
$207 thousand, or 10%, compared to the third quarter of last year. These
decreases were offset by increases in salary expense of $584 thousand, or
10%, and pension and other employee benefits of $123 thousand, or 11%, when
compared to the third quarter of 1998. Returns on average assets and average
equity were 1.12% and 12.45%, respectively, for the third quarter of 1999
compared with 1.20% and 12.64%, respectively, for the third quarter of 1998.
Net income before special items for the nine months ended September 30, 1999
was $12.501 million, or $1.33 diluted earnings per share compared with
$11.911 million or $1.27 diluted earnings per share for the nine months ended
September 30, 1998. For the nine months ended September 30, 1999 compared
with September 30, 1998, net income including special items increased
slightly to $12.397 million, or $1.32 diluted earnings per share, compared to
$12.386 million, or $1.32 diluted earnings per share. Returns on average
assets and average equity were 1.14% and 12.56%, respectively, for the first
nine months of 1999 compared with 1.23% and 12.92%, respectively, for the
first nine months of 1998.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income, which is the sum of interest and certain fees generated by
earning assets minus interest paid on deposits and other funding sources, is the
principal source of Bancorp's earnings, representing approximately 71% of gross
revenue through the first nine months of 1999. Net interest income is influenced
by a number of external economic and competitive factors such as Federal Reserve
Board monetary policy and its influence on market interest rates; loan demand
and competition from nonbank lenders; and competition with investment managers,
brokerage firms and investment bankers for consumer and commercial business
assets that might otherwise be deposited in banks. Internal factors impacting
levels and changes in net interest income are attributed to Bancorp's interest
rate risk management policies, which address a variety of issues including loan
and deposit pricing strategies, funding alternatives, and maturity schedules.
Bancorp has not made use of derivatives, interest rate hedges, or similar
instruments or transactions to manage interest rate risk.
Average balances and rates for each major category of interest-earning assets
and interest-bearing liabilities for the third quarter and year-to-date periods
are presented on a comparative basis in Table 1. Net interest income on a
taxable-equivalent basis increased by 4%, or $533 thousand for the third quarter
of 1999, compared to the third quarter of 1998, and 2%, or $829 thousand for the
first nine months of 1999, compared to the first nine months of 1998. Average
earning assets increased 8% for the third quarter and first nine months of 1999
compared with the same periods in 1998. Average loan growth amounted to an
increase of 4% for the quarter and 2% for the nine months ended September 30,
1999 as compared to the same periods last year. The average balance in the
investment portfolio increased $72.7 million, or 20% for the quarter and $80.8
million, or 23% for the nine months partially in recognition of expected loan
demand. The yield on earning assets across all
18
<PAGE>
sectors decreased 40 basis points to 7.63% and 45 basis points to 7.65% for
the three and nine months ended September 30, 1999, respectively, compared with
the same periods last year.
19
<PAGE>
Table 1. Consolidated Average Balances, Interest and Average Rates (Taxable
Equivalent Basis)
<TABLE>
<CAPTION>
September 30,
- ------------------------------------------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------------------
QTD Average Average QTD Average Average
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
INTEREST-EARNING ASSETS:
Short-term funds $ 19,079 $ 275 5.77% $ 25,692 $ 443 6.90%
- ------------------------------------------------------------------------------------------------------------------
Investment securities: (1)
Tax-exempt(2) 133,300 2,265 6.80 102,420 1,830 7.15
Taxable 298,887 4,572 6.12 257,037 3,872 6.03
- ------------------------------------------------------------------------------------------------------------------
Total investment securities 432,187 6,837 6.33 359,457 5,702 6.35
- ------------------------------------------------------------------------------------------------------------------
Loans, net, including loans held for sale 910,698 19,069 8.31 875,562 19,374 8.78
- ------------------------------------------------------------------------------------------------------------------
Total interest-earning assets and average yield 1,361,964 26,181 7.63 1,260,711 25,519 8.03
- ------------------------------------------------------------------------------------------------------------------
TOTAL NONINTEREST-EARNING ASSETS 96,809 99,977
- ------------------------------------------------------------------------------------------------------------------
Total assets $1,458,773 $1,360,688
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits:
Savings $ 148,637 $ 805 2.15% $152,695 $ 951 2.47%
Checking 160,083 902 2.24 136,900 866 2.51
Money market accounts 190,506 1,464 3.05 149,403 1,060 2.81
Certificates of deposit 512,246 6,591 5.10 505,523 6,970 5.47
- ------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 1,011,472 9,762 3.83 944,521 9,847 4.14
- ------------------------------------------------------------------------------------------------------------------
Short-term borrowings:
Federal funds purchased and securities
sold under agreements to repurchase 66,855 772 4.58 50,395 641 5.05
Other short-term borrowings 8,044 112 5.52 19,758 274 5.50
- ------------------------------------------------------------------------------------------------------------------
Total short-term borrowings 74,899 884 4.68 70,153 915 5.17
- ------------------------------------------------------------------------------------------------------------------
Long-term borrowings 93,217 1,252 5.33 69,910 1,007 5.71
- ------------------------------------------------------------------------------------------------------------------
Total borrowed funds 168,116 2,136 5.04 140,063 1,922 5.44
- ------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities and 1,179,588 11,898 4.00 1,084,584 11,769 4.31
average rate incurred
- ------------------------------------------------------------------------------------------------------------------
NONINTEREST-BEARING LIABILITIES
Demand deposits 135,312 131,686
Other liabilities 13,021 14,879
Shareholders' equity 130,852 129,539
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $1,458,773 $1,360,688
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Net interest income $14,283 $13,750
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Net interest spread 3.63% 3.72%
- ------------------------------------------------------------------------------------------------------------------
Net interest margin 4.16% 4.33%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
Table 1. (continued) Consolidated Average Balances, Interest and Average Rates
(Taxable Equivalent Basis)
<TABLE>
<CAPTION>
September 30,
- ----------------------------------------------------------------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
YTD Average Average YTD Average Average
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
INTEREST-EARNING ASSETS:
Short-term funds $29,767 $1,049 4.70% $28,140 $1,186 5.62%
- ----------------------------------------------------------------------------------------------------------------------------
Investment securities: (1)
Tax-exempt(2) 130,949 6,717 6.84 94,836 5,079 7.14
Taxable 295,833 13,375 6.03 251,108 11,626 6.17
- ----------------------------------------------------------------------------------------------------------------------------
Total investment securities 426,782 20,092 6.28 345,944 16,705 6.44
- ----------------------------------------------------------------------------------------------------------------------------
Loans, net, including loans held for sale 897,061 56,341 8.40 881,814 58,178 8.82
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets and average yield 1,353,610 77,482 7.65 1,255,898 76,069 8.10
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL NONINTEREST-EARNING ASSETS 94,969 93,220
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $1,448,579 $1,349,118
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
LIABILITIES
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits:
Savings $150,833 $2,562 2.27% $157,685 $2,931 2.49%
Checking 155,592 2,717 2.33 137,723 2,644 2.57
Money market accounts 177,201 3,855 2.91 143,198 2,945 2.75
Certificates of deposit 518,278 20,178 5.21 496,556 20,326 5.47
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 1,001,904 29,312 3.91 935,162 28,846 4.12
- ----------------------------------------------------------------------------------------------------------------------------
Short-term borrowings:
Federal funds purchased and securities
sold under agreements to repurchase 58,537 1,893 4.32 46,580 1,750 5.02
Other short-term borrowings 7,393 309 5.59 44,037 1,833 5.57
- ----------------------------------------------------------------------------------------------------------------------------
Total short-term borrowings 65,930 2,202 4.47 90,617 3,583 5.29
- ----------------------------------------------------------------------------------------------------------------------------
Long-term borrowings 95,233 3,777 5.30 51,819 2,278 5.88
- ----------------------------------------------------------------------------------------------------------------------------
Total borrowed funds 161,163 5,979 4.96 142,436 5,861 5.50
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities and 1,163,067 35,291 4.06 1,077,598 34,707 4.31
average rate incurred
- ----------------------------------------------------------------------------------------------------------------------------
NONINTEREST-BEARING LIABILITIES
Demand deposits 139,071 133,049
Other liabilities 14,460 10,341
Shareholders' equity 131,981 128,130
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $1,448,579 $1,349,118
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income $42,191 $41,362
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Net interest spread 3.59% 3.79%
- ----------------------------------------------------------------------------------------------------------------------------
Net interest margin 4.17% 4.40%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Average Balances and the related average rate are based on amortized cost.
(2) Based on an effective federal tax rate of 35% for 1999 and 1998.
21
<PAGE>
Average interest-bearing deposits increased $67.0 million, or 7%, and $66.7
million, or 7%, for the three and nine month periods, respectively, over last
year. Growth occurred in nearly all deposit products, with the exception of
basic savings. Additional long-term funding was provided principally by
Federal Home Loan Bank advances, which average balance increased $23.3
million, or 33%, for the three months and $43.4 million, or 83.8% for the
nine months ended September 30, 1999, respectively, as compared to last year.
Challenged by the decline in market interest rates between the comparable
periods, and low growth in loans, the net interest margin, which is the ratio
of taxable-equivalent net interest income to average earning assets,
decreased 17 basis points to 4.16% and 23 basis points to 4.17% for the
three-and nine-month periods ended September 30, 1999, respectively, as
compared to last year.
PROVISION FOR CREDIT LOSSES.
Bancorp decreased the provision for credit losses by 84% to $100 thousand for
the third quarter of 1999 compared with $625 thousand for the third quarter
of 1998. The decrease was attributable to a significant recovery realized in
the third quarter of $225 thousand, coupled with improvement in credit
quality. For the nine-month period ended September 30, 1999, the provision
decreased $831 thousand or 47% as compared to last year. The decreases were
attributed to an improvement in credit quality.
NONINTEREST INCOME.
Total noninterest income increased 1% to $5.412 million for the quarter ended
September 30, 1999 compared with $5.368 million for the quarter ended
September 30, 1998. Service charges on deposit accounts increased $176
thousand, or 13% for the third quarter of 1999 compared to the third quarter
of 1998. Insurance income increased 14% to $1.577 million for the third
quarter of 1999 from $1.379 million for the third quarter of 1998. These
increases were partially offset by a decrease in gains on sales of securities
of $144 thousand, or 91% compared to the third quarter of last year.
Additionally, gains on sales of loans decreased $202 thousand, or 50%, for
the third quarter of 1999 compared with the same quarter last year due to the
more favorable rate environment and high refinance activity that occurred
during the third quarter of 1998.
For the comparable nine month periods, total noninterest income declined by
8% to $16.3 million for 1999 from $17.6 million for 1998. Excluding gains
from the sales of securities in both years and other one-time gains/(losses)
realized in 1998, principally $489 thousand realized from the sale of the
former headquarters facility, noninterest income decreased $72 thousand, or
less than 1%. Trust and investment management income increased $120 thousand,
or 6%, relating to growth in managed assets. Insurance income increased $478
thousand, or 11%, and service charges on deposit accounts increased $113
thousand, or 3%, for the nine months ended September 30, 1999 as compared to
last year. Gains on the sales of loans decreased to $552 thousand for the
first nine months of 1999, down 65% from $1.6 million for the same period in
1998 related to the same factors described for the quarter. Other operating
income decreased 4% at September 30, 1999 compared to the first nine months
of last year. For the nine months ended September 30, 1998, other operating
income included the nonrecurring gains referred to above. Excluding these
gains in 1998, other operating income increased 6% over last year.
NONINTEREST EXPENSE.
Total noninterest expense increased 9% to $13.1 million for the third quarter of
1999 compared with $12.1 million for the third quarter of last year. Salary
expense increased $584 thousand, or 10% for the third quarter of 1999 as
compared to the third quarter of 1998 and pension and employee benefits
increased $123 thousand or 11% for the comparable periods. For the third quarter
of 1999 occupancy and equipment expense decreased $207 thousand, or 10% as
compared to the third quarter of 1998. Other operating expense increased $552
thousand, or 17% compared to the third quarter of last year. Bancorp's
efficiency ratio (the ratio of adjusted
22
<PAGE>
noninterest expense to the sum of net interest income on a tax equivalent
basis and recurring noninterest income) increased to 64.6% for the quarter ended
September 30, 1999 from 62.5% for the quarter ended September 30, 1998.
For the comparable nine-month periods, total noninterest expense decreased
$51 thousand to $38.1 million at September 30, 1999. Salary expense decreased
$175 thousand, or 1% and pension and other employee benefits decreased $358
thousand, or 9% for the nine months ended September 30, 1999, as compared to
the same period in 1998. Occupancy and equipment expense fell $509 thousand,
or 8% for the comparable nine-month periods. Other operating expense
increased $991 thousand, or 9% to $11.5 million for the nine months ended
September 30, 1999 from $10.5 million for the same period last year. For the
year-to-date periods, the efficiency ratio declined to 63.7% for 1999
compared with 63.8% for 1998.
INCOME TAXES.
The provision for income taxes declined 5% to $1.539 million for the third
quarter of 1999, from $1.612 million for the third quarter of 1998. Tax expense
varies from one period to the next with changes in the level of income before
taxes, changes in the amount of tax-exempt income, and the relationship of these
changes to each other. The effective tax rate for the third quarter of 1999 and
1998 was 27% and 28%, respectively. Income tax expense differs from the amount
computed at statutory rates primarily due to tax-exempt interest from certain
loans and investment securities. For the nine months ended September 30, 1999
and 1998, the effective tax rate was 27% and 28%, respectively.
23
<PAGE>
NONPERFORMING ASSETS
Table 2 summarizes Bancorp's nonperforming assets and contractually past-due
loans. Through asset resolutions and sales, total nonperforming assets at
September 30, 1999 declined $4.3 million compared with year-earlier levels and
declined $1.6 million since year-end 1998. Loans past due 90 days or more as to
interest or principal increased $671 thousand compared with prior year levels
and decreased $364 thousand since year-end. Although there is no direct
correlation between nonperforming loans and ultimate loan losses, an analysis of
nonperforming loans may provide some indication of the quality of the loan
portfolio.
POTENTIAL PROBLEM LOANS
At September 30, 1999, Bancorp had $21.8 million in loans to borrowers who were
currently experiencing financial difficulties such that management had
reasonable concerns that such loans might become contractually past due or be
classified as a nonperforming asset.
These loans are subject to the same close attention and regular credit reviews
as extended to loans past due 90 days or more and nonperforming assets. At
December 31, 1998, potential problem loans totaled $23.1 million.
TABLE 2. NONPERFORMING ASSETS AND CONTRACTUALLY PAST-DUE LOANS
<TABLE>
<CAPTION>
September 30, December 31,
- ---------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonperforming assets:
Nonaccrual loans(1) $ 3,152 $ 6,300 $ 4,196
Other real estate owned net of valuation allowance(2) 1,147 2,294 1,705
- ---------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 4,299 $ 8,594 $ 5,901
- ---------------------------------------------------------------------------------------------------------
Loans past due 90 or more days as to interest or principal(3) $ 1,627 $ 956 $ 1,991
- ---------------------------------------------------------------------------------------------------------
Nonperforming loans to total loans 0.34% 0.71% 0.47%
Nonperforming assets to total loans and other real estate owned 0.46% 0.97% 0.66%
Nonperforming assets to total assets 0.29% 0.61% 0.41%
Allowance for credit losses times nonperforming loans 3.94x 1.98x 3.05x
Allowance for credit losses times nonperforming assets 2.89x 1.45x 2.17x
</TABLE>
(1) Loans are placed on nonaccrual status when, in the opinion of
management, reasonable doubt exists as to the full, timely collection of
interest or principal, or a specific loan meets the criteria for nonaccrual
status established by regulatory authorities. When a loan is placed on
nonaccrual status, all interest previously accrued but not collected is reversed
against current period interest income. No interest is taken into income on
nonaccrual loans unless received in cash, or until such time the borrower
demonstrates sustained performance over a period of time in accordance with
contractual terms.
(2) Other real estate owned includes: banking premises no longer used for
business purposes and real estate acquired by foreclosure (in partial or
complete satisfaction of debt), or otherwise surrendered by the borrower to
Bancorp's possession. Other real estate owned is recorded at the lower of cost
or fair value on the date of acquisition or transfer from loans. Write-downs to
fair value at the date of acquisition are charged to the allowance for credit
losses. Subsequent to transfer, these assets are adjusted through a valuation
allowance to the lower of the net carrying value or the fair value (net of
estimated selling expenses) based on periodic appraisals.
(3) Nonaccrual loans are not included.
24
<PAGE>
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is maintained at a level, which in management's
judgement, is adequate to absorb losses inherent in the loan portfolio. The
adequacy of the allowance for credit losses is reviewed regularly by management.
Additions to the allowance are made by charges to the provision for credit
losses. On a quarterly basis, a comprehensive review of the adequacy of the
allowance is performed considering factors such as historical relationships
among loans outstanding, loss experience, delinquency levels, individual loan
reviews, and evaluation of the present and future local and national economic
environment. While management believes the allowance for credit losses is
adequate at September 30, 1999, the estimate of losses and related allowance are
subject to change due to economic and other uncertainties inherent in the
estimation process.
As reflected in Table 3, the allowance for credit losses as a percentage of
loans decreased to 1.33% as of September 30, 1999 from 1.41% at September 30,
1998. Net loan charge-offs during the first nine months of 1999 decreased $28
thousand to $1.342 million as compared to $1.370 million for the first nine
months of 1998.
Bancorp had loans amounting to approximately $1.7 million and $4.7 million at
September 30, 1999 and September 30, 1998, respectively, that were specifically
classified as impaired and included in nonaccrual loans in Table 2. The average
balance of impaired loans for the nine-month periods ended September 30, 1999
and September 30, 1998 amounted to $1.8 million and $5.0 million, respectively.
Cash receipts for these same periods were $1.7 million and $519 thousand,
respectively. The average balance of impaired loans for the three-month periods
ended September 30, 1999 and September 30, 1998 amounted to $1.4 million and
$5.0 million, respectively. Cash receipts for these same periods were $259
thousand and $105 thousand, respectively. All cash receipts were applied to the
principal balance of the impaired loans except for $37 thousand that was
recognized as interest income for the nine months ended September 30, 1999.
There was no specific allowance for credit losses related to these impaired
loans at September 30, 1999. The specific allowance for credit losses related to
impaired loans at September 30, 1998 was $646,000.
25
<PAGE>
TABLE 3. ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
Period ended
- -------------------------------------------------------------------------------------------------
September 30, December 31,
- -------------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average loans outstanding less average unearned income (1) $897,061 $881,814 $875,196
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Allowance for credit losses at beginning of year $12,817 $12,069 $12,069
- -------------------------------------------------------------------------------------------------
Charge-offs:
Real estate 483 507 1,053
Commercial and industrial 131 148 273
Consumer 2,727 3,012 4,010
- -------------------------------------------------------------------------------------------------
Total loans charged-off 3,341 3,667 5,336
- -------------------------------------------------------------------------------------------------
Recoveries:
Real estate 302 414 430
Commercial and industrial 287 85 104
Consumer 1,410 1,798 2,494
- -------------------------------------------------------------------------------------------------
Total recoveries 1,999 2,297 3,028
- -------------------------------------------------------------------------------------------------
Net charge-offs 1,342 1,370 2,308
- -------------------------------------------------------------------------------------------------
Provisions for credit losses 950 1,781 3,056
- -------------------------------------------------------------------------------------------------
Allowance for credit losses at end of period $12,425 $12,480 $12,817
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Net charge-offs to average loans outstanding, annualized 0.15% 0.16% 0.26%
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Allowance for credit losses to period-end loans 1.33% 1.41% 1.44%
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) Exclusive of loans held for sale.
26
<PAGE>
Table 4 presents an allocation of the allowance for credit losses to various
loan categories. This allocation does not limit the amount of the allowance
available to absorb losses from any type of loan and should not be viewed as an
indicator of the specific amount or specific loan categories in which future
charge-offs may ultimately occur.
TABLE 4. ALLOCATION OF ALLOWANCES FOR CREDIT LOSSES
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31 ,
- ---------------------------------------------------------------------------------------------------------
1999 1998 1998
- ---------------------------------------------------------------------------------------------------------
% Gross % Gross % Gross
(Dollars in thousands) Amount Loans(1) Amount Loans(1) Amount Loans(1)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate
Construction and land development $1,002 6.0% $2,385 7.9% $1,767 6.9%
Residential mortgage 447 29.4 598 29.3 920 29.8
Other mortgage 3,977 22.8 3,057 20.8 3,419 22.2
Commercial and industrial 1,875 11.7 1,216 10.6 1,764 10.3
Consumer 2,965 28.8 4,001 29.5 3,599 28.9
Unallocated 2,159 1.3 1,223 1.9 1,348 1.9
- ---------------------------------------------------------------------------------------------------------
Total allowance for credit losses $12,425 100.0% $12,480 100.0% $12,817 100.0%
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes loans held for sale.
YEAR 2000 COMPUTER READINESS
This disclosure is provided pursuant to the Securities and Exchange Commission's
Interpretation entitled "Disclosure of Year 2000 Issues and Consequences by
Public Companies, Investment Advisors, Investment Companies and Municipal
Securities Issuers" effective August 4, 1998.
The Year 2000 issue arose because many existing date-sensitive computer
programs, hardware, software, and other devices relying on imbedded chip
technology do not recognize a year that begins with "2" because traditional
programming has been limited to utilization of a two-digit code for a year (such
as "98" for the year 1998). F&M Bancorp and its subsidiaries have undertaken to
review their operating and information technology systems and other mechanical
equipment such as elevators to identify systems in which the Year 2000 issue
exists and to undertake the necessary renovation or replacement of these systems
so that the companies will continue to operate as usual after January 1, 2000.
In July 1997, F&M Bancorp established a Year 2000 issue task team comprised of
representatives across functional lines representing all of its subsidiaries.
The Year 2000 issue task team developed a Year 2000 issue assurance plan to
coordinate and direct its efforts. The plan was approved by the board of
directors on September 11, 1997. The task team provides quarterly reports to the
board outlining the status of its efforts and its anticipated work in the coming
quarter.
The assurance plan is composed of five phases: 1) awareness; 2) assessment; 3)
renovation; 4) validation; and, 5) implementation, which mirror guidelines
developed by the Federal Financial Institutions Examination Council (FFIEC) to
deal with the Year 2000 issue. The assurance plan includes a timeline for
completion of all tasks identified. As of September 30, 1999, all critical tasks
are current according to the timeline. Activities under each of the phases are
ongoing as new vendor and customer relationships are created.
27
<PAGE>
The task team has received guidance from various regulators including the Office
of the Comptroller of the Currency (OCC), Securities and Exchange Commission
(SEC), Office of Thrift Supervision (OTS), and FFIEC.
The task team established a program to educate all associates regarding the Year
2000 issue both for internal systems and as the issue may affect customers.
Education of customers is continuing through periodic information in the form of
brochures, seminars, a toll free information line, a web page, and participation
in community forums. Both activities are consistent with the Year 2000 customer
communication outline issued by the FFIEC on February 17, 1999.
All vendors who supply hardware, software and/or services of any type which may
be affected by this issue have been identified and contacted. A total of four
hundred eighty-eight (488) products and services are represented by this vendor
listing and have been categorized as either mission critical (those that
directly impact daily operations), concern (those that can be replaced with
manual processes), or low priority (little or no impact on daily operations).
Vendors have been surveyed as to their Year 2000 issue readiness. The task team
has confirmed vendor responses by testing products and services where possible
to verify their readiness.
Of the one hundred twenty-four (124) products and services identified as mission
critical:
A. Forty-two (42) are not date sensitive and are deemed Year 2000
issue ready.
B. Nineteen (19) cannot be tested internally. The progress of
these service providers' efforts addressing the Year 2000
issue are being closely monitored. All nineteen (19) advise
that their products and/or services are either Year 2000 issue
ready now or will be in advance of January 1, 2000. Examples
of products and/or services that are not capable of internal
testing include utilities and communications services.
C. Sixty-three (63) have been successfully tested.
Bancorp relies on Kirchman Corporation's Dimension 3000 software for maintaining
customer accounting records. Kirchman is a provider of accounting systems for
more than 1,000 banking clients worldwide. Kirchman's internal methodologies
addressing Year 2000 issues have been reviewed and have received ITAA*2000
certification by the Information Technology Association of America, an
independent non-profit organization. Further, Kirchman systems have passed all
internal tests, and testing is complete.
The task team has developed procedures for assessing Year 2000 issue risk for
its funds providers, including depositors, which are intended to manage and
limit potential risks associated with large or significant concentrations of
retail and commercial deposits. The Year 2000 issue readiness of providers of
lines of credit have been reviewed.
The task team has also established procedures, utilizing the standard risk
classifications employed to manage credit risk, for reviewing the Year 2000
issue readiness of borrowers. Loan relationships with balances exceeding
$250,000, or which are particularly computer reliant, have been reviewed. No
relationships are adversely risk rated because of Year 2000 issue risk.
Bancorp's existing contingency plan has been enhanced to provide responses for
Year 2000 issues. The contingency planning committee adopted the five phase
model as recommended by the FFIEC and OCC advisory letter 98-7 and had an
updated plan by December 31, 1998, as required by the regulators. Testing of
business resumption plans was substantially complete at March 31, 1999.
To date, Bancorp has spent a total of $225,000 addressing Year 2000 issues and
anticipates additional out-of-pocket expenses of $289,000 to complete. Work is
done predominantly by existing associates as part of their
28
<PAGE>
normal work responsibilities. Bancorp does not separately track these internal
costs which are principally payroll related. Costs for dealing with Year 2000
issues are being provided from operating revenues.
Bancorp believes its efforts, and those of its third-party providers, will
effectively address Year 2000 issues before January 1, 2000. Because Bancorp is
so reliant on third-party providers (whose products and services cannot be
effectively tested such as utilities and telecommunications services) for
support, Bancorp's normal business operations could be disrupted in the event
one or more third-party providers fail to provide products and services as
contracted. The most reasonably likely worst case Year 2000 issue scenario
identified to date involves Bancorp's inability, for short periods, to provide
services to customers. The worst case scenario is mitigated somewhat by an
ability to manually process customer transactions, by the geographic penetration
of our branch network, and by alternative service delivery methods, which
include both proprietary and network ATMs, PC banking, telephone banking, and
Express Bank, Bancorp's full-service mobile branch. Power and telecommunication
services are critical, but might be interrupted for only a part of the branch
network. Bancorp has a generator to provide power to operate computer systems
and, by contract, has geographically remote facilities served by alternative
sources of power to process work, if needed. Longer periods of disruption could
affect Bancorp's ability to develop new business and could increase costs of
operation and decrease revenues. Bancorp has generators placed strategically in
its branch network to allow for continued operations in the event of power
interruptions. The generators will enhance Bancorp's ability to conduct business
as usual in any natural disaster, in addition to any Year 2000 issue related
power outage.
CAPITAL RESOURCES
Shareholders' equity totaled $130.3 million at September 30, 1999, a decrease of
1% compared with the 1998 year-end level of $131.4 million, and a decrease of 2%
from the year earlier level of $132.7 million. The fair value of the
available-for-sale portfolio declined $7.2 million (net of deferred taxes) since
year-end, reflecting the negative impact of higher market interest rates.
Capital levels were considered sufficient to absorb anticipated future price
volatility in the available-for-sale portfolio.
Bancorp's risk-based capital and leverage capital ratios continue to exceed
regulatory guidelines as of September 30, 1999, as follows:
TABLE 5. CAPITAL RATIOS
<TABLE>
<CAPTION>
Risk-based Capital
- ------------------------------------------------------
Tier 1 Total Leverage
Capital Capital Ratio
- ------------------------------------------------------
<S> <C> <C> <C>
Actual 12.98% 14.21% 9.01%
Regulatory Minimum 4.00% 8.00% 3.00%
- ------------------------------------------------------
Excess 8.98% 6.21% 6.01%
- ------------------------------------------------------
- ------------------------------------------------------
</TABLE>
Fair value adjustments to shareholders' equity for changes in the fair value of
securities classified as available-for-sale are excluded from the calculation of
these capital ratios in accordance with regulatory guidelines.
29
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk is defined as the future changes in market prices that increase or
decrease the value of financial instruments, i.e. cash, investments, loans,
deposits and debt. Included in market risk are interest rate risk, foreign
currency exchange rate risk, commodity price risk, and other relevant market
risks. Bancorp's primary source of market risk is interest rate risk. Market
risk-sensitive financial instruments are entered into for purposes other than
trading.
Interest rate risk refers to the exposure of Bancorp's earnings and capital to
changes in interest rates. The magnitude of the effect of changes in market
rates depends on the extent and timing of such changes and on Bancorp's ability
to adjust. The ability to adjust is controlled by the time remaining to maturity
on fixed-rate obligations, the contractual ability to adjust rates prior to
maturity, competition, and customer actions.
There are several common sources of interest rate risk that must be effectively
managed if there is to be minimal impact on Bancorp's earnings and capital.
Re-pricing risk arises largely from timing differences in the pricing of assets
and liabilities. Reinvestment risk refers to the reinvestment of cash flows from
interest payments and maturing assets at lower rates. Basis risk exists when
different yield curves or pricing indices do not change at precisely the same
time or in the same magnitude such that assets and liabilities with the same
maturity are not all affected equally. Yield curve risk refers to unequal
movements in interest rates across a full range of maturities.
In determining the appropriate level of interest rate risk, Bancorp considers
the impact on earnings and capital of the current outlook on interest rates,
potential changes in interest rates, regional economies, liquidity, business
strategies, and other factors. To effectively measure and manage interest rate
risk, traditional cumulative gap and simulation analysis are used to determine
the impact on net interest income and the market value of portfolio equity
("MVE"). Bancorp attempts to manage interest rate sensitivity on the basis of
when assets and liabilities WILL reprice as opposed to when they CAN reprice.
Cumulative gap analysis presents the net amount of assets and liabilities that
will most likely reprice through specified periods if there are no changes in
balance sheet mix. Using that analysis, the effect of changes in market interest
rates, both rising and falling, on net interest income can be calculated.
Because of inherent limitations in traditional cumulative gap analysis, however,
ALCO also employs more sophisticated interest rate risk measurement techniques.
Simulation analysis is used to subject the current re-pricing conditions to
rising and falling interest rates in increments and decrements of 100, 200, and
300 basis points, and to determine how net interest income varies under
alternative interest rate and business activity scenarios. ALCO also measures
the effects of changes in interest rates on the MVE, i.e. the net present value
of all the future cash flows from Bancorp's financial instruments expressed as
the percentage change in portfolio value of equity for any given change in
prevailing interest rates. Table 6 presents Bancorp's MVE at September 30, 1999.
30
<PAGE>
TABLE 6. Effects of Changes in Interest Rates on MVE at September 30, 1999
<TABLE>
<CAPTION>
(Dollars in thousands)
- --------------------------------------------------------------------------------
Percent Change
---------------------------
Hypothetical
Market Value Change Hypothetical
Change in of Portfolio Increase Increase Board
Interest Rates Equity (Decrease) (Decrease) Limit(1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
300 bp rise $ 119,995 $ (28,942) (19.4)% (30.0)%
200 bp rise 128,940 (19,997) (13.4) (20.0)
100 bp rise 138,370 (10,567) (7.1) (10.0)
Base scenario 148,937 -- -- --
100 bp decline 161,952 13,015 8.7 (10.0)
200 bp decline 173,350 24,413 16.4 (20.0)
300 bp decline 185,498 36,561 24.5 (30.0)
</TABLE>
(1) Established by Bancorp's Board of Directors
Computations of prospective effects of hypothetical interest rate changes are
based on many assumptions, including relative levels of market interest rates,
loan prepayments and changes in deposit levels. They are not intended to be a
forecast and should not be relied upon as indicative of actual results. Further,
the computations do not contemplate certain actions that management could take
in response to changes in interest rates. At September 30, 1999 and 1998, the
changes in net interest income and or MVE calculated under these alternative
methods were within limits established by the Board of Directors and monitored
by ALCO.
31
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Agreement and Plan of Merger between F&M
Bancorp and Patapsco Valley Bancshares, Inc.
dated September 7, 1999. Filed as Exhibit
2.1 to the company's report on Form 8-K/A
filed September 22, 1999 and incorporated
herein by reference.
2.2 Amendment Number 1 to Agreement and Plan of
Merger between F&M Bancorp and Patapsco
Valley Bancshares, Inc. dated October 19,
1999. Filed as Exhibit 2.2 to the company's
report on Form 8-K/A filed October 25, 1999
and incorporated herein by reference.
3.1 Articles of Incorporation of F&M Bancorp
with all Articles of Amendment. Filed as
Exhibit 3.1 to the company's quarterly
report on Form 10-Q for the period ended
September 30, 1997 and incorporated herein
by reference.
3.2 By-Laws of F&M Bancorp with all
amendments. Filed as Exhibit 3.2 to the
Company's quarterly report on Form 10-Q for
the period ended September 30, 1997 and
incorporated herein by reference.
4. Description of F&M Bancorp common stock and
rights of security holders. Filed as Exhibit
4 to the Company's quarterly report on Form
10-Q for the period ended September 30, 1997
and incorporated herein by reference.
10.1 1983 Stock Option Plan of F&M Bancorp as
amended in April, 1996. Filed as Exhibit
10.1 to Registration Statement on Form S-8
(File #002-88390) and incorporated herein by
reference.
10.2 Unfunded Deferred Compensation Plan for
Non-Employee Directors of F&M Bancorp as
amended and restated effective August 18,
1998. Filed as Exhibit 10.2 to the Company's
annual report on Form 10-K for the year
ended December 31, 1998 and incorporated
herein by reference.
10.3 Farmers and Mechanics National Bank
Executive Supplemental Income Plan as
amended and restated effective August 18,
1998. Filed as Exhibit 10.3 to the Company's
annual report on Form 10-K for the year
ended December 31, 1998 and incorporated
herein by reference.
10.4 F&M Bancorp Employee Stock Purchase Plan.
Filed as Prospectus to Registration
Statement on Form S-8 (File #33-39941) and
incorporated herein by reference.
10.5 F&M Bancorp Dividend Reinvestment and Stock
Purchase Plan. Filed as Prospectus to
Registration Statement on Form S-3 (File
#33-39940) and incorporated herein by
reference.
32
<PAGE>
10.6 1995 Stock Option Plan of F&M Bancorp. Filed
as Exhibit 10.1 to Registration Statement on
Form S-8 (File #333-02433) and incorporated
herein by reference.
10.7 Employment Agreement between F&M Bancorp,
Home Federal Savings Bank and Richard W.
Phoebus, Sr. Filed as Exhibit 10.7 to the
Company's annual report on Form 10-K for the
year ended December 31, 1996 and
incorporated herein by reference.
10.8 Employment Agreement between F&M Bancorp,
Home Federal Savings Bank and Steven G.
Hull. Filed as Exhibit 10.8 to the Company's
annual report on Form 10-K for the year
ended December 31, 1996 and incorporated
herein by reference.
10.9 Employment Agreement between F&M Bancorp,
Home Federal Savings Bank and Salvatore M.
Savino. Filed as Exhibit 10.9 to the
Company's annual report on Form 10-K for the
year ended December 31, 1996 and
incorporated herein by reference.
10.10 Employment Agreement between F&M Bancorp,
Home Federal Savings Bank and Celia S.
Ausherman. Filed as Exhibit 10.10 to the
Company's annual report on Form 10-K for the
year ended December 31, 1996 and
incorporated herein by reference.
10.11 Form of F&M Bancorp stock options
substituted for Home Federal Corporation
stock options granted under the Home Federal
Corporation 1988 Stock Option and Stock
Appreciation Rights Plan filed as Exhibit
99.3 to Registration Statement on Form S-8
(File #333-16709) and incorporated herein by
reference.
10.12 Form of F&M Bancorp stock options
substituted for Monocacy Bancshares, Inc.
stock options granted under the Monocacy
Bancshares, Inc. 1994 Stock Incentive Plan
and the Monocacy Bancshares, Inc. 1997
Independent Director Stock Option Plan.
Filed as exhibit 10.12 on Form 10-Q for the
quarterly period ended June 30, 1999
and incorporated herein by reference.
10.13 F&M Bancorp Executive Deferred Compensation
Plan adopted April 21, 1998. Filed as
Exhibit 10.13 to the Company's annual report
on Form 10-K for the year ended December 31,
1998 and incorporated herein by reference.
10.14 F&M Bancorp Change in Control Employment
Agreement. Filed as exhibit 10.14 on Form
10-Q for the quarterly period ended June 30,
1999 and incorporated herein by reference.
10.15 Employment Agreement for Michael K. Walsch
dated as of July 31,1998. Filed as Exhibit
10.15 to the Company's annual report on Form
10-K for the year ended December 31, 1998
and incorporated herein by reference.
10.16 Supplemental Retirement Plan Agreement dated
November 17, 1994 by and between Taneytown
Bank & Trust Company and Michael K. Walsch.
Filed as Exhibit 10.16 to the Company's
annual report on Form 10-K for the year
ended December 31, 1998 and incorporated
herein by reference.
33
<PAGE>
10.17 Taneytown Bank & Trust Company Key Employee
life insurance program. Filed as Exhibit
10.17 to the Company's annual report on Form
10-K for the year ended December 31, 1998
and incorporated herein by reference.
10.18 Home Federal Corporation Deferred
Compensation Plan for Non-Employee
Directors. Filed as Exhibit 10.18 to the
Company's annual report on Form 10-K for the
year ended December 31, 1998 and
incorporated herein by reference.
10.19 F&M Bancorp 1999 Employee Stock Option Plan.
Filed as Exhibit 10.19 on Form 10-Q for the
quarterly period ended March 31, 1999 and
incorporated herein by reference.
10.20 F&M Bancorp 1999 Stock Option Plan for
Non-Employee Directors. Filed as Exhibit
10.20 on Form 10-Q for the quarterly period
ended March 31, 1999 and incorporated herein
by reference.
11. Statement re: computation of per share
earnings. Filed as an exhibit hereto and
incorporated herein by reference.
27. Financial Data Schedule. Filed as an exhibit
hereto and incorporated herein by reference.
(b) Reports on Form 8-K
1. Report on Form 8-K filed September 8, 1999;
press release and presentation to analysts
regarding agreement and plan of merger and
acquisition of Patapsco Valley Bancshares by
F&M Bancorp.
2. Report on Form 8-K/A filed September 22,
1999, agreement and plan of merger by and
between F&M Bancorp and Patapsco Valley
Bancshares, Inc.
3. Report on Form 8-K filed October 4, 1999;
supplemental restated financial information
regarding acquisition of Potomac Basin Group
Associates, Inc.
4. Report on Form 8-K/A filed October 25, 1999,
amendment No. 1 to agreement and plan of
merger by and between F&M Bancorp and
Patapsco Valley Bancshares, Inc.
5. Report on Form 8-K/A filed November 1, 1999,
restated financial information regarding
acquisition of Potomac Basin Group
Associates, Inc.
Under Part II, items 1 through 3 and item 5 have been omitted since the item is
either inapplicable or the answer is negative.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
F&M BANCORP
---------------------------
(Registrant)
November 15, 1999 /s/ Faye E. Cannon
- ----------------------------- ---------------------------
Date FAYE E. CANNON
PRESIDENT AND CEO
`
35
<PAGE>
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Earnings per share ("EPS") is calculated on a Basic EPS and Diluted EPS basis.
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders (the numerator) by the weighted-average number of common
shares outstanding (the denominator) during the period. Income available to
common shareholders is Net Income in the table below and as reported in
Bancorp's income statement. No adjustments were required to net income for any
EPS calculations.
Diluted EPS is calculated by adjusting the denominator for all dilutive
potential common shares that were outstanding during the period. Bancorp had
stock options outstanding during the periods presented below which had a
dilutive effect on EPS. Therefore, the number of additional common shares that
would have been outstanding if the options had been exercised is added to the
denominator to arrive at the dilutive number of shares.
The calculations of earnings per share below are based on the weighted average
number of shares outstanding, adjusted for the 5% stock dividend paid July 28,
1999, including all common stock and common stock equivalents in conformity with
the instructions for Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
(Dollars in thousands) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $4,105 $4,127 $12,397 $12,386
====== ====== ====== ======
Basic EPS
Shares 9,355,737 9,260,586 9,339,761 9,248,497
EPS $0.44 $0.45 $1.33 $1.34
Dilutive Shares
Stock options 46,861 114,771 54,843 113,594
EPS $0.00 $0.01 $0.01 $0.02
Diluted EPS
Shares including options 9,402,598 9,375,357 9,394,604 9,362,091
EPS $0.44 $0.44 $1.32 $1.32
- ---------------------------------------------------------------------------------------------------
</TABLE>
36
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 48,398
<INT-BEARING-DEPOSITS> 3,860
<FED-FUNDS-SOLD> 8,324
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 310,350
<INVESTMENTS-CARRYING> 107,355
<INVESTMENTS-MARKET> 106,131
<LOANS> 934,431
<ALLOWANCE> 12,425
<TOTAL-ASSETS> 1,475,755
<DEPOSITS> 1,135,444
<SHORT-TERM> 1,746
<LIABILITIES-OTHER> 14,275
<LONG-TERM> 103,746
0
0
<COMMON> 46,804
<OTHER-SE> 83,484
<TOTAL-LIABILITIES-AND-EQUITY> 1,475,755
<INTEREST-LOAN> 56,194
<INTEREST-INVEST> 17,808
<INTEREST-OTHER> 1,049
<INTEREST-TOTAL> 75,051
<INTEREST-DEPOSIT> 29,312
<INTEREST-EXPENSE> 35,291
<INTEREST-INCOME-NET> 39,760
<LOAN-LOSSES> 950
<SECURITIES-GAINS> 14
<EXPENSE-OTHER> 38,111
<INCOME-PRETAX> 16,966
<INCOME-PRE-EXTRAORDINARY> 12,397
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,397
<EPS-BASIC> 1.33
<EPS-DILUTED> 1.32
<YIELD-ACTUAL> 4.17
<LOANS-NON> 3,152
<LOANS-PAST> 1,627
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 21,825
<ALLOWANCE-OPEN> 12,817
<CHARGE-OFFS> 3,341
<RECOVERIES> 1,999
<ALLOWANCE-CLOSE> 12,425
<ALLOWANCE-DOMESTIC> 10,266
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,159
</TABLE>
